Background
The decision in Scott, Pichelli & Easter Limited v. Dupont Developments Ltd., 2022 ONCA 757, delves into the proper interpretation of s. 78(3) of the Construction Act.
This ruling comes approximately 10 years after a dispute arose pertaining to a property containing a contaminated dry-cleaning business. The tenant-operator closed up shop in 2011 and the owners decided to sell the property. The sale was complete in 2012 and the new owner, a corporation, financed the purchase through a vendor take back (VTB) mortgage. At that time, the new owner set about cleaning up the contaminated premises and solicited the services of an environmental services company and a moulding/plastering company.
These trades were later forced to register liens when their services to the property went unpaid. Importantly, due to fraudulent activity by the new owners, the property was eventually placed into receivership and sold under power of sale with the proceeds paid into court. The issue of priorities became central in determining which parties (secured lenders and lien claimants) would be entitled to the sale proceeds.
The respondents on the appeal were the mortgagees who claimed entitlement to the mortgage principal payments, interest, and related enforcement charges. The appellant were the trades with liens on the property who claimed entitlement to the proceeds and further argued that if the mortgagees were entitled to money, it was only to the principal amount and not interest or other related enforcement charges.
At stake was the dwindling amount of proceeds paid into court. The amount held in court was $412,223.16. If the court accepted the lienholders arguments, those parties could receive the full amount of their lien ($329,135.43) with the balance going to the mortgagees. However, if the mortgagees were successful with their claim (over $1 million for just interest and enforcement fees alone) then all the sale proceeds paid into court would go to them and nothing would be left for the lien holders.
The question for the court was whether the language of s. 78(3) of the Construction Act gave the mortgagees entitlement to the sale proceeds in priority to the lienholders, and if so, whether it was limited to the principal amounts of the mortgage or if it extended to interest and enforcement payments.
Ruling
At first instance, Master Carol Albert ruled in favour of the mortgagees, finding that the mortgage principal together with the interest and related enforcement charges had priority over the lien claims. The motions judge agreed with the Master concerning the mortgage principal but determined the interest and other charges did not have priority over the liens. On appeal, the Divisional Court reversed the motion judge’s decision and restored the Master’s ruling. The parties then appealed to the Court of Appeal for Ontario.
In sum, the Court of Appeal agreed with the Master’s ruling and found that the priority created by s. 78(3) for prior mortgages extended also to the arrears in interest and enforcement costs.
The court noted that while the Construction Act is meant to protect lien claimants, there are clear exceptions, and in certain circumstances, a mortgage and related costs is one such exception.
The appellants focused on the language at s.78(3)(b)(i) “advanced in the case of a mortgage” in making two central arguments, both of which were rejected by the court. The first argument was that a VTB was not a true mortgage because no money had been advanced and secondly that even if a VTB were a true mortgage, interest and enforcement costs should not be considered advances of funds and therefore not given the same protections as the principal mortgage amount.
The appellants further argued that the Supreme Court of Canada decision in M. Sullivan & Son Ltd. v. Rideau Carleton Raceway Holdings Ltd., [1971] S.C.R. 2, only gave interest and enforcement costs the same priority as principal amounts in cases of building/construction mortgages and not conventional mortgages.
The Court of Appeal rejected both arguments. The court determined that the SCC decision in Sullivan did not stand for the proposition advanced by the appellants, that there was no precedent supporting the appellants interpretation, and that if such an interpretation were adopted, it would create uncertainty and impracticality in lending along within undue risk. In effect, mortgagees would constantly have to monitor owners’ improvements to ensure the costs would not deplete their entitlement to payments for interest and possible enforcement in the event of an insolvency.
The Court of Appeal therefore concluded that the priority did extend to interest and enforcements costs.